Question

17\. South Korea to Resume U.S. Beef Imports South Korea will reopen its market to most U.S. beef. South Korea banned imports of U.S. beef in 2003 amid concerns over a case of mad cow disease in the United States. The ban closed what was then the third-largest market for U.S. beef exporters. a. Explain how South Korea's import ban on U.S. beef affected beef producers and consumers in South Korea. b. Draw a graph of the market for beef in South Korea to illustrate your answer to part (a). Identify the changes in consumer surplus, producer surplus, and deadweight loss.

Short answer

The ban increased prices and producer surplus while reducing consumer surplus and creating deadweight loss from decreased market efficiency.

Step-by-step solution

Understand the Scenario

In 2003, South Korea imposed a ban on imports of U.S. beef due to concerns about mad cow disease. This affected both beef producers and consumers in South Korea by altering market dynamics.

Identify the Effects on Producers

With the import ban in place, domestic beef producers faced less competition from U.S. beef. This likely led to an increase in the prices they could charge for beef, enhancing their producer surplus.

Identify the Effects on Consumers

Consumers in South Korea had fewer choices and likely faced higher beef prices due to the lack of cheaper U.S. beef imports. This resulted in a decrease in consumer surplus.

Analyze Market Equilibrium Before and After the Ban

Before the ban, the market equilibrium in South Korea included both domestic and U.S. beef. Post-ban, the supply curve shifted leftwards due to the lack of imports, raising prices and reducing quantities.

Draw the Market Graph

Graph the market for beef in South Korea. The demand curve (D) and the two supply curves (S_domestic + S_imports pre-ban, and S_domestic post-ban) should be shown. Mark the initial equilibrium price and quantity (P1, Q1) and the new equilibrium post-ban (P2, Q2).

Identify Changes in Surpluses

The increase in price from P1 to P2 raises producer surplus but decreases consumer surplus. The total welfare loss due to the absence of more efficient U.S. beef is represented by the deadweight loss, which is the area between the demand and supply curves from Q2 to Q1.

Label Consumer and Producer Surplus Areas

Label the areas on the graph where consumer surplus was lost and where producer surplus was gained. Also, shade in the section that represents deadweight loss.

Key concepts

Consumer Surplus

Consumer surplus is a core concept in economics. It represents the difference between what consumers are willing to pay for a good and what they actually pay. When South Korea banned U.S. beef imports, the consequence was a higher price for beef. This increase in price meant that South Korean consumers had to pay more for beef, reducing their consumer surplus.
With fewer options available and higher prices, the overall enjoyment or benefit that consumers derive from purchasing beef diminished. Essentially, consumers were worse off after the ban because they paid more and might have consumed less than they typically would. To visualize this on a graph, the consumer surplus shrinks, as the area under the demand curve, above the new higher price level, and up to the quantity bought decreases.

Producer Surplus

Producer surplus is the difference between what producers are paid for a good and their actual cost of production. It is an indicator of producer benefits. Before the ban, U.S. beef was a significant part of the market. Domestic producers had to price their beef competitively.
However, with the ban on U.S. imports, South Korean producers faced less competition. The decrease in supply raised prices, and producers could sell their beef at higher prices than before. This increase in price means that producer surplus increased, as beef producers were selling their product at a higher profit.
On a supply and demand graph, this can be shown as an increase in the area above the supply curve and below the higher market price.

Deadweight Loss

Deadweight loss refers to the total economic loss that occurs when market efficiency is not acheived. In the context of South Korea's ban on U.S. beef, this inefficiency surfaced due to the restriction of imports, raising the price and reducing the quantity of beef in the market.
When consumers paid more than they used to and consumed less, some economic value was forfeited. Similarly, domestic producers couldn’t fully meet the demand, leading to lost potential transactions. The deadweight loss is the area on the graph between the reduced quantity and original quantity traded before the ban.
This triangle-shaped area represents the total net loss in welfare to the society, both from the consumer and producer perspectives.

Market Equilibrium

Market equilibrium occurs at a point where the quantity demanded equals the quantity supplied. The initial equilibrium price and quantity included both domestic and U.S. beef supplies. When South Korea imposed the ban on U.S. beef, the supply curve shifted to the left, leading to a new equilibrium.
This new equilibrium is characterized by a higher price and a lower quantity of beef. The absence of U.S. beef meant that the market couldn't supply as much beef at lower prices, which resulted in a higher equilibrium price.
A simple way to picture this shift is by drawing a basic supply and demand graph. Before the ban, the equilibrium price would be at the intersection of the demand curve and the combined supply curve (domestic + imports). Post-ban, the new, left-shifted supply curve intersects the demand curve at a higher price and lower quantity point.

Supply and Demand Shift

The concepts of supply and demand shifts are fundamental to understanding market changes. In this scenario, the supply is directly affected by the ban on U.S. beef imports. This restriction reduced the overall beef supply in South Korea, causing the supply curve to shift leftwards.
A leftward shift in the supply curve usually causes an increase in price and a decrease in the quantity of goods available. Consumers now face higher prices, and some might be unable to buy beef at the new prices. Producers benefit from higher prices but can't compensate for the entire lost supply.
For a practical illustration, envision the supply curve moving left along the X-axis with the equilibrium point rising vertically on the Y-axis, showing a higher price and lower quantity. This shift affects the whole market, rebalancing it at a less optimal position.” } ] } } ` ] } } } } } “ } } i is is l j jidge